When community leaders are ready to start a serious land protection program, the first question may well be, "How can we fund it?" This webcast covers the details of raising municipal open space monies via bonds and taxes. Next month's LandSavers show will outline the steps in running a successful open space funding campaign.

This is what you should know about open space financing in Pennsylvania:

• Public funds are needed
• Support of voters
• Public financing options

Adapted and excerpted from the forthcoming publication, Public Finance for Open Space: A Guide for Pennsylvania's Municipalities, Heritage Conservancy. Copyright © 2003 PA DCNR, all rights reserved.






Municipalities starting up a land protection program should count on only a limited number of landowners who will be willing to donate conservation easements on their properties. ( See the upcoming LandSavers' webcast, "Understanding Conservation Easements," to learn more about this. ) Many more landowners will want to be paid in cash for all or a portion of the value of their land. Even if a municipality is fortunate enough to have many charitably-minded landowners, money will be needed for hard costs like appraisals, surveys, and legal expenses.

Although Pennsylvania has shown considerable leadership in funding land conservation ( see summary of state-level funding programs ), and a growing number of counties are beginning open space grant programs, municipalities will probably find it necessary to supplement outside funding sources with funds of their own, raised through local taxes and bonds. The possibility of raising local funds for park, open space, and recreation projects depends on a variety of factors, including the economic health and borrowing history of a community, and the political will of local elected leaders and the electorate.

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In spite of recent political trends throughout the United States favoring reduced taxes and reduced public spending at all levels of government, spending on open space is gaining in popularity. In 2002, voters nationwide approved 141 ballot measures for open space, committing almost $10 billion in funding for parks and conservation.

In Pennsylvania, voters have demonstrated solid and increasing support for open space, approving numerous open space tax and bond referenda, the majority of them in the southeastern part of the state. ( See results of a poll ) Altogether, local governments in Pennsylvania have authorized over $525 million in open space borrowings at the county and municipal levels, plus millions more in annual open space taxes. ( See a list of communities that have raised open space funds, 27K PDF File. )

The funding raised by these communities varies greatly in amount, from the hundreds of thousands to the tens of millions. In 2000, voters in Upper Makefield, Bucks County, approved a $15 million financing for open space acquisition, the largest such municipal measure to date. Some townships and counties have had more than one successful referendum.

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Municipalities have two basic financing methods:

  • "pay-as-you-go", in which spending is limited to current revenues, or
  • borrowing, spending funds now and paying them back over an extended period.

    Sometimes local governments combine the two techniques, passing measures to incur debt and to implement a dedicated tax for open space acquisition simultaneously. In this way, revenues from the dedicated tax can help provide funds to pay off the debt.

    Details about the two funding methods are found below.

  • PAY-AS-YOU-GO

    Pros & Cons.
    With pay-as-you-go approaches, the government spends revenues from general appropriations or from a dedicated funding source. These funding sources — which can include property taxes, earned income taxes, real estate transfer taxes, or budget surpluses — can be attractive to debt-averse voters and public officials. "Pay-as-you-go" means year-by-year accountability and no borrowing costs. On the downside, it also means relatively small annual revenues (sometimes too small to pay for large land protection projects), and funding can be difficult to sustain as the leadership of a community changes.

    Property Tax.
    Voters in Milford Township in Bucks County and Halfmoon Township in Centre County have approved real estate millage increases for open space, and a number of municipalities use real estate taxes to pay for debt service on open space bonds.
    ( Learn more about using property taxes to fund open space. )

    Earned Income Tax (EIT).
    To date, voters in East Bradford, North Coventry, and East Vincent Townships in Chester County and in East Rockhill, West Rockhill, Springfield, and Hilltown Townships in Bucks County have approved EITs ranging from 0.125% to 0.25%. ( Learn more about using earned income taxes to fund open space. )

    Real Estate Transfer Tax.
    Radnor Township in Delaware County increased its real estate transfer tax from 0.75% to 1% and dedicated the additional revenues from the increase to open space. ( Learn more about using real estate transfer taxes to fund open space. )

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  • BORROWING

    Pros & Cons.
    Borrowing — by issuing bonds, utilizing bond pools, or borrowing from commercial lenders — presents its own set of opportunities and drawbacks. On one hand, borrowing can provide a community with the funds and flexibility it needs up front to fund large-scale park and open space projects, while land is available and costs are lower than they will be in the future. Costs are spread out over a long time horizon and therefore are borne by both current and future beneficiaries. On the other hand, financing charges accrue, and convincing voters of the merits of incurring debt can sometimes be challenging.

    Bank Debt.
    While governments often issue bonds to raise large amounts of money, in some cases the interest rate on a bank loan may be lower than that for a bond. In general, it may be more cost-effective to finance small amounts of debt (up to $2-3 million) through a bank loan, since the transaction costs for issuing bonds are significant. In the past, banks shied away from lending larger sums, but some municipalities have had success in borrowing up to $5 million or more at a time from local lenders, and the ceiling for bank loans may continue to rise as banks compete with bond issuers for municipalities' business.

    Regional Finance Authorities.
    Municipalities may be able to save on financing costs by turning to a regional finance authority, such as the Delaware Valley Regional Finance Authority (created by Bucks, Delaware, Montgomery and Chester Counties). The finance authority borrows funds in large amounts and re-lends the proceeds to municipalities in smaller amounts. In this way the finance authority is often able to offer municipalities a better interest rate than they can find on their own.

    Installment Purchase Agreement (IPAs).
    IPAs provide another mechanism for financing open space purchases. With an IPA, the government puts the purchase price into a tax-free annuity instead of giving the money directly to the landowner. The landowner receives tax-free interest from the annuity for a fixed number of years (usually 20 or 30), and then at the end of the period the full amount of the principal is transferred to the owner. In this way the landowner postpones the taxation of the principal amount, and in the interim, receives tax-free payments semi-annually. The municipality typically purchases Treasury bonds to cover the payments.

    Timing of Debt.
    In addition to deciding which type of debt is most advantageous, borrowers need to take into consideration the timing of the borrowing. A municipality that approves a large amount of debt may not need all of the funds right away. If all of the money is borrowed in a lump sum at the outset, interest will begin to accrue immediately, even if the funds are not being used. The funds will sit in an account, perhaps earning less in interest than the municipality is paying on the debt. Even if the account pays a higher rate of interest, municipalities may be restricted from realizing arbitrage gains through reinvestment of the funds. A municipality may wish to borrow in phases over time as the need arises, or seek a line of credit from a bank.

    Debt Limits.
    Under Pennsylvania's Act 153 of 1996, local governments seeking to raise open space monies may borrow funds or levy taxes above the statutorily-set limits if they first receive referendum approval from the voters. ( Learn more about Pennsylvania law on open space financing. )

    Financial Advisors.
    Given the complexities of this kind of financing, it makes sense to get advice from experienced lending professionals who are familiar with the range of debt instruments and strategies that are available. A qualified financial advisor will be able to propose a variety of options and explain the advantages and disadvantages of each. Many municipalities are concerned about the impact new debt will have on taxes, since ultimately debt must be paid off using a revenue source, in many cases through increased property taxes. A financial adviser can help calculate the likely tax impact of various debt packages.
    ( See sample township fiscal impact calculation, 27K PDF File. )

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